10 Inventory KPIs to focus on in 2024

Table of contents

10 Inventory KPIs to focus on in 2024

Inventory management embodies a complex realm, encompassing a wide array of activities from ordering to shipping, all with the ultimate goal of fulfilling customer orders punctually and completely. Key Performance Indicators (KPIs) for inventory management are indispensable tools in this intricate process. They provide a means to measure and analyze the efficacy of inventory-related activities, eliminating guesswork and paving the way for strategic, data-driven decisions.

Choosing the Right KPIs for Your Business

The selection of KPIs is a crucial step that demands careful consideration. Here’s a guide to identifying which ones align with your business needs:

  • Relevance and Value: Opt for KPIs that offer insightful information to enhance inventory management practices.
  • Alignment with Business Goals: They should support your overarching business objectives, whether it’s improving cash flow, meeting customer service targets, or fostering growth.
  • Customer Satisfaction: Remember to account for customer satisfaction levels to ensure their repeat business.
  • System Compatibility: Assess whether your current systems are equipped to track your chosen indicators or if upgrades are necessary.
10 Inventory KPIs for Retailers to Focus on in 2024

10 crucial Inventory KPI’s to ensure that you stay informed

  1. Inventory Turnover Ratio: This KPI is a critical measure of how efficiently inventory is managed, indicating the number of times inventory is sold and replaced over a specific period, typically a year. A high turnover ratio suggests efficient inventory management, implying that the company is good at selling and replenishing its stock. Conversely, a low turnover ratio may indicate overstocking or inefficiencies in sales strategies. It’s calculated by dividing the cost of goods sold by the average inventory value.
  2. Stock to Sale Ratio: This ratio helps businesses understand the balance between the inventory they have on hand and what they’ve sold. It’s crucial for maintaining the right inventory levels to meet customer demand without overstocking. By monitoring this ratio, companies can adjust their inventory procurement to reduce holding costs and improve cash flow, ultimately maintaining high margins and minimizing stockouts. It’s determined by dividing inventory value by sales value.
  3. Sell-Through Rate: Sell-through rate measures the percentage of inventory sold compared to the total inventory received from suppliers within a certain timeframe. This KPI is invaluable for assessing demand forecasting accuracy, identifying popular products, and managing storage costs. A high sell-through rate indicates that a product is well-received and aligns with consumer demand, while a low rate may signal overstocking or misaligned demand forecasts. It’s calculated as (units sold/units received) x 100.
  4. Demand Forecast Accuracy: Accurate demand forecasting is pivotal for ensuring stock availability, maximizing sales, and maintaining customer satisfaction. This KPI measures the accuracy of demand predictions against actual sales, helping businesses adjust their inventory strategies accordingly. Methods like the Mean Absolute Percent Error (MAPE) and Mean Absolute Deviation (MAD) are commonly used to calculate forecast accuracy. Improving this KPI reduces carrying costs and enhances inventory turnover rates.
  5. Backorder Rate: The backorder rate indicates the percentage of customer orders that cannot be fulfilled immediately due to stock unavailability. A high backorder rate often reflects poor demand forecasting or inventory management practices, potentially harming customer satisfaction and loyalty. It’s crucial for businesses to monitor this rate closely and implement strategies to minimize backorders, thereby enhancing the customer experience. The formula for calculating the backorder rate is (Number of undeliverable orders/total number of orders) x 100.
  6. Carrying Costs of Inventory: These costs represent the total expenses associated with holding inventory in storage, including capital costs, storage space costs, service costs, and risk costs. High carrying costs can erode profit margins, making it essential for businesses to optimize their inventory levels to reduce these expenses. Effective inventory management and optimization strategies can help minimize carrying costs, keeping them within the typical range of 15-20% of the average annual inventory cost.
  7. Order Cycle Time: This KPI measures the total time taken from when a customer places an order to when they receive it. It’s an essential metric for evaluating the efficiency of order processing and delivery systems. Shortening the order cycle time can significantly enhance customer satisfaction and loyalty, as customers increasingly expect faster delivery times. It also helps in reducing carrying costs by enabling more frequent ordering in smaller quantities.
  8. Rate of Return: The rate of return KPI tracks the percentage of sold items that are returned by customers. A high rate of return can indicate issues with product quality, inaccurate product descriptions, or customer dissatisfaction. Analyzing the reasons behind returns can provide valuable insights for improving product offerings and customer service. This KPI is calculated as (Number of units returned/Number of units sold) x 100.
  9. Order Pick, Pack, and Dispatch Accuracy: This set of KPIs measures the accuracy and efficiency of picking, packing, and dispatching orders in the warehouse. High accuracy in these processes reduces errors, minimizes returns, and improves customer satisfaction. Implementing technologies like barcode scanning and warehouse management systems can enhance accuracy and productivity in these areas.
  10. Service Level: This KPI assesses the ability of a business to meet customer demand from available inventory. It’s a direct indicator of how well a company manages its inventory to fulfill orders. Setting high service levels for high-demand or high-margin products can ensure customer satisfaction and loyalty. Service levels are typically set based on the product’s importance and demand volatility, with the aim of minimizing stockouts while avoiding excessive inventory holding.

By meticulously monitoring and optimizing these KPIs, businesses can achieve a fine-tuned balance between meeting customer demand and maintaining operational efficiency, thereby driving growth and profitability.

Elevate your inventory management with Octai Inventory Intelligence. Harness the power of Machine Learning to master your retail KPIs, predict trends, and meet customer demands effortlessly. Say goodbye to guesswork and optimize your inventory for efficiency and profitability. Contact us at Octai and transform your inventory management into a strategic advantage.

Let’s innovate together for a more profitable tomorrow.